Does KNH Enterprise (TPE:9919) Have The Makings Of A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in KNH Enterprise's (TPE:9919) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for KNH Enterprise, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = NT$688m ÷ (NT$6.6b - NT$2.0b) (Based on the trailing twelve months to September 2020).

Therefore, KNH Enterprise has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Household Products industry average of 16%.

View our latest analysis for KNH Enterprise

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating KNH Enterprise's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is KNH Enterprise's ROCE Trending?

We're delighted to see that KNH Enterprise is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 15%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From KNH Enterprise's ROCE

In summary, we're delighted to see that KNH Enterprise has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 3 warning signs with KNH Enterprise and understanding them should be part of your investment process.

While KNH Enterprise isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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